[untitled]
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The idea of vesting is to prove that founders can build value before getting rewarded with their stock. When founders start, they usually need to build in some form of vesting to prevent one of them from just walking away with a windfall while the others continue to work hard to build value in the venture. Even then, however, if founders have already build some value before the formal structure is put in place, they will take their restricted stock grants with some portions immediately vested (usually 20% or so, maybe up to 33%). At Series A, the investors might insist that founders restructure their stock positions so that they have to vest at least a significant part over some period. This can vary but usually means that the founders get cut back so that only, say, one-third of their stock is vested, with the balance subject to vesting over a few years. This ensures that the investors will not get screwed and that the founders will earn out their positions as they use the investors' money to continue to build value. Finally, at the M&A stage, the purchase price is sometimes divided between a cash/stock portion that is given outright to the stockholders and another portion (usually an option grant) that needs to be earned out. The basic idea behind such a division is that x amount rewards them for the value they have built and the balance will reward them for continuing to add value in the future. Usually, the x part is by far the largest part of the consideration, with the balance (the part that needs to be earned going forward) amounting to, say, 10 or 20% of the total purchase price.
The consistent theme in all such cases is to make sure that those who have built value get non-forfeitable equity as a reward while those who need to prove themselves going forward get equity that can be forfeited.
If you have built true value, then, of $10M and you take your payment in stock that is 100% forfeitable, you set it up where you can be cheated out of all the value you have built with little or no legal recourse.
This is a HUGE red flag. I have seen founders do such deals and have begged and implored them, at the very least, to insist on 100% acceleration clauses in their employment arrangements should they be terminated without good cause. In the one case where the founders went through anyway without such protection, the company (a prominent public company) wound up terminating one of the main founders within months and all he got was a few crumbs for years worth of effort.
Check with a good M&A lawyer on this and then use your best judgment. It is ultimately your call, whatever the legal risks. But do it with open eyes and that means getting good help in assessing what those risks are.
The consistent theme in all such cases is to make sure that those who have built value get non-forfeitable equity as a reward while those who need to prove themselves going forward get equity that can be forfeited.
If you have built true value, then, of $10M and you take your payment in stock that is 100% forfeitable, you set it up where you can be cheated out of all the value you have built with little or no legal recourse.
This is a HUGE red flag. I have seen founders do such deals and have begged and implored them, at the very least, to insist on 100% acceleration clauses in their employment arrangements should they be terminated without good cause. In the one case where the founders went through anyway without such protection, the company (a prominent public company) wound up terminating one of the main founders within months and all he got was a few crumbs for years worth of effort.
Check with a good M&A lawyer on this and then use your best judgment. It is ultimately your call, whatever the legal risks. But do it with open eyes and that means getting good help in assessing what those risks are.
> To me, this would be enough to immediately reject the offer.
To me that would be reason enough to make sure I negotiated the deal in such a way that if the company fires us that our stock will vest instantly.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
No, get advisors anyway.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
What's good for one party may be great for the other!
There is this joke about the rights to an invention being sold for a relatively low amount, where the buyer confides after the deal to the seller 'we'd have bought it for ten times as much', whereupon the seller answers 'I'd have sold it for ten time less'.
To me that would be reason enough to make sure I negotiated the deal in such a way that if the company fires us that our stock will vest instantly.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
No, get advisors anyway.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
What's good for one party may be great for the other!
There is this joke about the rights to an invention being sold for a relatively low amount, where the buyer confides after the deal to the seller 'we'd have bought it for ten times as much', whereupon the seller answers 'I'd have sold it for ten time less'.
To me that would be reason enough to make sure I negotiated the deal...
Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
> Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
Ok, in that case I would word it as 'we're taking it under consideration' to buy some time to regroup. And then respond after thinking things over with a counter-offer, not with a rejection.
> As a general rule I don't think it's good to make deals with people you don't trust.
As a general rule, I'd agree. But M&A is hardball and typically an acquisition of a 'goldfish' is not going to be done by explain patiently how they're actually worth 4 times as much and by educating them. It may come in very handy that they have not managed to attract advisors savvy enough to guide them through this.
I'm actually a bit confused about how a company could get as far as 7 figure turnover and an 8 figure buy-out offer while still being this green business-wise.
Typically by the time you get that far you've got an excellent relationship with your corporate lawyer and a tax advisor.
Ok, in that case I would word it as 'we're taking it under consideration' to buy some time to regroup. And then respond after thinking things over with a counter-offer, not with a rejection.
> As a general rule I don't think it's good to make deals with people you don't trust.
As a general rule, I'd agree. But M&A is hardball and typically an acquisition of a 'goldfish' is not going to be done by explain patiently how they're actually worth 4 times as much and by educating them. It may come in very handy that they have not managed to attract advisors savvy enough to guide them through this.
I'm actually a bit confused about how a company could get as far as 7 figure turnover and an 8 figure buy-out offer while still being this green business-wise.
Typically by the time you get that far you've got an excellent relationship with your corporate lawyer and a tax advisor.
Well the reason we got this far is because we spent the last decade of our lives working extremely hard to make products that people in our industry want. That is all we did. No networking, no events, etc. If we needed money we either figured out a way to make do or we took pay cuts. An exit never occurred to us because we were too busy doing what we do.
We're definitely green as far as this stuff goes but that's because we've existed in our niche bubble for the last 5-10 years and never really had much reason to go speak to anyone besides our general counsel and CPA. None of us have any business training beyond what we've picked up along the way.
We're definitely green as far as this stuff goes but that's because we've existed in our niche bubble for the last 5-10 years and never really had much reason to go speak to anyone besides our general counsel and CPA. None of us have any business training beyond what we've picked up along the way.
Wow. Ok, you'll need to 'grow up' in a hurry then, I'd hate to be in your shoes. Typically by the time you get to this state you've been through the grinder often enough to have a useful repertoire of armor and arms to deal with a situation like this.
Play it careful!
Play it careful!
Hey founder001,
I was in a very similar situation to you recently. Is there any way we can have a chat ?
I was in a very similar situation to you recently. Is there any way we can have a chat ?
> It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
That's an, er, interesting rule. A big part of modern financial and legal infra-structure is designed so that we can make business with people we don't trust. If you do business only with you people you can trust then you might as well live like a hermit.
That's an, er, interesting rule. A big part of modern financial and legal infra-structure is designed so that we can make business with people we don't trust. If you do business only with you people you can trust then you might as well live like a hermit.
If by modern financial and legal infra-structure you mean things like stocks, futures, and derivatives, then I don't think I agree. The modern infrastructure insulates two parties in any transaction with brokers and exchanges.
For example, if the "losing" party on an options trade can't pay up, the exchange pays for them. The exchanges and brokers set margin requirements to reduce the risk of non-payers.
For example, if the "losing" party on an options trade can't pay up, the exchange pays for them. The exchanges and brokers set margin requirements to reduce the risk of non-payers.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
In most cases, you're absolutely right. With investment bankers, completely different.
Investment bankers will turn this into a process, try to pick up multiple bidders, and add to the complexity of trying to get the deal done. In general, bankers (not lawyers!) can be harmful to a deal.
They could be telling him that they're in for a simple deal, but if it gets complicated, that's not worth it to them.
In most cases, you're absolutely right. With investment bankers, completely different.
Investment bankers will turn this into a process, try to pick up multiple bidders, and add to the complexity of trying to get the deal done. In general, bankers (not lawyers!) can be harmful to a deal.
They could be telling him that they're in for a simple deal, but if it gets complicated, that's not worth it to them.
I think this is dead on.
Shop around now.
You have 1 offer. You're quite likely to get a much better offer (by either the current oferee (?) or another one), with just a few weeks of work.
Shop around, for real.
"Has (without saying so) implied that they make an offer and that is it" -> standard negotiation practice.
Shop around, even if "selling" isn't your strong point.
Practically, tell them you need some time to think this through. Then, when you have another offer (either better or worse), tell them very briefly: "We've had another offer. We don't want to turn this into a bidding war. We need some more time to think about our next steps." (Of course you want to turn this into a bidding war.)
I once got an offer for a startup out of the blue, just after I decided I was tired of it (karma!). I was going to take it. My girlfriend told me to ask for 50% more, and they gave it to me with only a little pushback. I could have likely gotten double.
3x revenue in STOCK sounds like a BAD deal. 3x revenue basically means: if they pretty much abandon the whole thing and let it run out a few years, they'll still make money. If they offer you just 3x revenue, it should be cash.
Ask for 6 time revenue in cash, as your counteroffer.
If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
You have 1 offer. You're quite likely to get a much better offer (by either the current oferee (?) or another one), with just a few weeks of work.
Shop around, for real.
"Has (without saying so) implied that they make an offer and that is it" -> standard negotiation practice.
Shop around, even if "selling" isn't your strong point.
Practically, tell them you need some time to think this through. Then, when you have another offer (either better or worse), tell them very briefly: "We've had another offer. We don't want to turn this into a bidding war. We need some more time to think about our next steps." (Of course you want to turn this into a bidding war.)
I once got an offer for a startup out of the blue, just after I decided I was tired of it (karma!). I was going to take it. My girlfriend told me to ask for 50% more, and they gave it to me with only a little pushback. I could have likely gotten double.
3x revenue in STOCK sounds like a BAD deal. 3x revenue basically means: if they pretty much abandon the whole thing and let it run out a few years, they'll still make money. If they offer you just 3x revenue, it should be cash.
Ask for 6 time revenue in cash, as your counteroffer.
If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
Just to address this, we will not receive another offer. Period. It's annoying that I can't fully explain that without blowing our cover, but you'll just have to take my word on it :)
OK, fair enough. That diminishes your bargaining position.
So the options are: 1. Take the deal as is. 2. Negotiate the deal. 3. Keep working for 3 more years (3x revenue), and make the same money - salaries you would have made at BigCo, but PLUS you still have the company and money coming in for years after.
My calculation would be around 3: how exciting is that. Also, you have plenty to negotiate around. 3x revenue can be upped. Your employment conditions can be negotiated (ie. I get to spend 2 days a week on open source software, paid). Vesting can be negotiated (4 years is a really long time).
Or calculate it like this: current annual revenue = X. If you stay alone, assuming revenue will grow a little, work for 4 years and you get (5X + the total value of the company at that point, which is likely 4X-ish) = 9X. Work for 4 years in BigCo and you get 3X + salaries. (Adjust formula to take into account multiple founders etc). If your combined salaries would be about the same as your net revenue is now, it's a rather equal deal (except for the freedom). So it depends on how your salaries compare with your income now. A lot also depends on how you estimate the longevity and growth potential of your company. If it's gonna grow and keep going for 5 years, they're cutting you a bad deal. Also consider how much you could be making at some other company, in todays job market.
It's weird that you're sure you won't get another offer.
It also kind of sounds like a talent acquisition. Do they want you, or the company? Has that been discussed?
So the options are: 1. Take the deal as is. 2. Negotiate the deal. 3. Keep working for 3 more years (3x revenue), and make the same money - salaries you would have made at BigCo, but PLUS you still have the company and money coming in for years after.
My calculation would be around 3: how exciting is that. Also, you have plenty to negotiate around. 3x revenue can be upped. Your employment conditions can be negotiated (ie. I get to spend 2 days a week on open source software, paid). Vesting can be negotiated (4 years is a really long time).
Or calculate it like this: current annual revenue = X. If you stay alone, assuming revenue will grow a little, work for 4 years and you get (5X + the total value of the company at that point, which is likely 4X-ish) = 9X. Work for 4 years in BigCo and you get 3X + salaries. (Adjust formula to take into account multiple founders etc). If your combined salaries would be about the same as your net revenue is now, it's a rather equal deal (except for the freedom). So it depends on how your salaries compare with your income now. A lot also depends on how you estimate the longevity and growth potential of your company. If it's gonna grow and keep going for 5 years, they're cutting you a bad deal. Also consider how much you could be making at some other company, in todays job market.
It's weird that you're sure you won't get another offer.
It also kind of sounds like a talent acquisition. Do they want you, or the company? Has that been discussed?
> 3. Keep working for 3 more years (3x revenue), and make the same money -
That's three times revenue in three years, but not the same as a stock deal which vests in four years in stock that may be worth 0, also, revenues are not profits.
It would require far more insight in to the actual figures involved to say whether this is a good deal at all (or a bad one).
That's three times revenue in three years, but not the same as a stock deal which vests in four years in stock that may be worth 0, also, revenues are not profits.
It would require far more insight in to the actual figures involved to say whether this is a good deal at all (or a bad one).
> Just to address this, we will not receive another offer. Period.
>> If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
You just did.
>> If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
You just did.
That's fine. This offer is still crap. Throw it in the garbage.
The offer is crap but the process may not be and some elements of the offer indicate the other party is serious, welcome to hardball. Throwing the offer 'in the garbage' will end the negotiations, the trick is to gain control of the dialogue and to push back as hard as you can without breaking off the deal to see what room there is.
While you're very likely right, if the most important thing out of this entire discussion that the OP needs to get is you cannot accept the offer as is. They seem to actually believe the offerer that they aren't going to make another. Well then, at this point then, they just really need to go 'well that's crap' and toss it in if they're unwilling to counter.
They have to get to the point of accepting that accepting it is the absolutely worse thing they could do. Ending negotiations is far far far superior to actually accepting that offer.
Once they accept that, then they can counter, confident they're not losing anything. Even if this truly is the last offer, that's a better result than acceptance.
They have to get to the point of accepting that accepting it is the absolutely worse thing they could do. Ending negotiations is far far far superior to actually accepting that offer.
Once they accept that, then they can counter, confident they're not losing anything. Even if this truly is the last offer, that's a better result than acceptance.
Are you 37signals?
Hmm. Trust your gut feeling. Based on what you've written here, it doesn't seem like you or your partner are truly interested in doing this. It's a nice feather in your cap (the offer) but I would certainly avoid selling out until the cards are in your favor. Don't let yourself believe that because they're a large tech company they can put an offer down and you have to accept it.
Don't take it just because it came along, take it because you want it. You wouldn't date a girl (or guy) you weren't interested in just because it fell in your lap would you? Well... of course you might, but think about it. Also, I wouldn't get too anxious about the timeframe here. They've been courting you for 1.5 months, I can't see their offer and all that you guys have worked towards suddenly vanishing. They might have 8 figures they're willing to send your way, which gives an impression that they have the upper hand, but they're buying YOUR product, you have just as much leverage if not more. Take the time to think it through, write down the pro's and con's and compare the lists.
It sounds to me like you've sort of convinced yourself it is a bad idea, and you're putting that on the shelf at the sake of naiveté to find help from more experienced people. That's definitely a good thing, but I think that in the end this is really going to come down to how it will make the two of you feel. You'll fucking hate your guts if you walk away from selling your profitable 5 year old company if you're not completely happy with this.
Don't take it just because it came along, take it because you want it. You wouldn't date a girl (or guy) you weren't interested in just because it fell in your lap would you? Well... of course you might, but think about it. Also, I wouldn't get too anxious about the timeframe here. They've been courting you for 1.5 months, I can't see their offer and all that you guys have worked towards suddenly vanishing. They might have 8 figures they're willing to send your way, which gives an impression that they have the upper hand, but they're buying YOUR product, you have just as much leverage if not more. Take the time to think it through, write down the pro's and con's and compare the lists.
It sounds to me like you've sort of convinced yourself it is a bad idea, and you're putting that on the shelf at the sake of naiveté to find help from more experienced people. That's definitely a good thing, but I think that in the end this is really going to come down to how it will make the two of you feel. You'll fucking hate your guts if you walk away from selling your profitable 5 year old company if you're not completely happy with this.
My own experience: I sold my company few years ago and I was talking to two companies at that time. One made a verbal offer of 1 mil, all in stock, vested over 4 years (similar to yours) subject to employment. Another company had a 5 mil offer, which was OK'd by their board. Cash deal, but they wanted to stagger payments to something like 10 years. To that I said "no, not interested" (which was true) and basically went on with my life. They came back in a bit and offered a 3 year period in equal parts plus generous stock supplement vested over the same 3 year period. And after the deal was done I was chatting to their finance guy and he said that it did not matter to the company if to pay in cash or in stock, because they simply sold stock to their current investors to raise needed cash.
In other words and without knowing specifics of your situation, I would probably say "thank you, but no, not good enough" without getting into the negotiations. If they are interested enough, they will be back. And if they are not, then your concerns of being fired on a second day may be not that unfounded.
In other words and without knowing specifics of your situation, I would probably say "thank you, but no, not good enough" without getting into the negotiations. If they are interested enough, they will be back. And if they are not, then your concerns of being fired on a second day may be not that unfounded.
From our experience in previous companies:
-Always counter-offer. People actually expect that you do so and that's probably why they put the offer low initially.
-Get a lawyer and a tax-specialist to make sure you are doing everything right and keeping as much as you can.
Also, since you guys are profitable and doing well, don't get too desperate to sell...
-Always counter-offer. People actually expect that you do so and that's probably why they put the offer low initially.
-Get a lawyer and a tax-specialist to make sure you are doing everything right and keeping as much as you can.
Also, since you guys are profitable and doing well, don't get too desperate to sell...
Remember the key to negotiations: what's your best alternative to a negotiated agreement? In this case it sounds like you don't need this deal at all -- you're highly profitable, right? Maybe there's some concern that if you walk away, this company could build their own whatever-it-is and beat you in the market, but it will take them some time and is not a sure thing for them.
The other thing to be aware of is the anchoring principle in psychology. By lowballing you at the outset, they make the range of offers that will seem reasonable to you.
I have not sold a company. But this sounds like a ridiculous deal to me. 3x revenues, in stock with a 4-year vesting schedule? For a profitable business??
There's a key number here you haven't provided: what's your revenue growth rate? If your revenues are growing slowly, then 3x revenues in cash might be a reasonable multiple. But if you've been growing at 40% annually, then 3x is way too low; 6x is more like it, and 8x may not be out of the question, depending on how large the ultimate market appears to be.
The big question for you is how you would feel if the deal fell apart. While you chew on that, you might want to see if you can find any other potential acquirers.
Involving bankers would change the tone of the discussion, eh? To what, I wonder? Really, this makes me angry -- it sounds like they're trying to take advantage of your inexperience.
It's your call, of course. But reading this makes me hope you tell them that their offer isn't even worth discussion, and walk away.
The other thing to be aware of is the anchoring principle in psychology. By lowballing you at the outset, they make the range of offers that will seem reasonable to you.
I have not sold a company. But this sounds like a ridiculous deal to me. 3x revenues, in stock with a 4-year vesting schedule? For a profitable business??
There's a key number here you haven't provided: what's your revenue growth rate? If your revenues are growing slowly, then 3x revenues in cash might be a reasonable multiple. But if you've been growing at 40% annually, then 3x is way too low; 6x is more like it, and 8x may not be out of the question, depending on how large the ultimate market appears to be.
The big question for you is how you would feel if the deal fell apart. While you chew on that, you might want to see if you can find any other potential acquirers.
Involving bankers would change the tone of the discussion, eh? To what, I wonder? Really, this makes me angry -- it sounds like they're trying to take advantage of your inexperience.
It's your call, of course. But reading this makes me hope you tell them that their offer isn't even worth discussion, and walk away.
The problem with asking "What is your BATNA" is that these things often evolve organically during discussions. It's good to have a baseline, but it's really dumb to go back to the BATNA for a thumbs up/thumbs down determined after the initial offer after discussions have gone on for some time.
The different parameters of the deal that get tweaked along the way are often not considered in the beginning, and what was considered unfair at the beginning may, by the end, be considered fair when all the parameters are in place. The negotiation process is a discovery process for both parties and you're not in the same mindset at the beginning than you are at the end. It may turn out that you're willing to sell at the end for less than you thought, simply because the outlook at the new company looks so great that you think it's a fair deal. This isn't you being a sucker, this is you responding to new information. You being a sucker is when you know you're not happy but you cave anyway.. you'll know the difference between this and an academic difference between your expectations and the final negotiated deal that really doesn't matter.
The different parameters of the deal that get tweaked along the way are often not considered in the beginning, and what was considered unfair at the beginning may, by the end, be considered fair when all the parameters are in place. The negotiation process is a discovery process for both parties and you're not in the same mindset at the beginning than you are at the end. It may turn out that you're willing to sell at the end for less than you thought, simply because the outlook at the new company looks so great that you think it's a fair deal. This isn't you being a sucker, this is you responding to new information. You being a sucker is when you know you're not happy but you cave anyway.. you'll know the difference between this and an academic difference between your expectations and the final negotiated deal that really doesn't matter.
Unless you are truly prepared to walk away from the offer, you won't receive what you are actually worth. It's scary as hell to do it. But if you turn it down, work hard for another year they make come back with a 5x offer.
Are you strategically valuable to them?
Also, if you've worked for 5 years on it and have an actual business, you should receive at least some up front.
Are you strategically valuable to them?
Also, if you've worked for 5 years on it and have an actual business, you should receive at least some up front.
How the hell do you have a 5-year-old, highly profitable company with multiple founders and $3MM - $10MM in annual revenues, and think that HN is a better place to ask this than to your attorneys and bankers?
He explained why-- he got the feeling that the professionals are trying to sell him a bill of goods, perhaps independently of an actual need, so he's coming here for a second opinion.
No, he said that they were being courted by attorneys and bankers who want the business. I understand why you wouldn't want to just take the first person who calls you. But he also asked if they should involve their attorney, which implies to me that they have one (they'd have to, right?). It just blows my mind that they're considering accepting an offer for possibly tens of millions and they haven't asked their attorney about it? That's insane.
Fully agreed, I also completely fail to understand how they got this far without a set of good advisors.
Either they do have a good set of advisors and they're just being thorough by asking HN (free advice from smart people, what's not to like?) or you have a new datapoint about the necessity of advisors.
We've received plenty of advice from advisors, but I wanted to get a perspective from someone who'd been exactly in our shoes before - not from the guys that helped them through it.
We're in the same revenue ballpark - though consulting business, so smaller multiples :(
We have used lawyers in the UK and US (for contract advice, that kind of thing) but we don't have one I'd turn to if I were in this position. It's certainly not impossible to reach this point without that kind of advisor around.
[Note: we started in the UK, which could be a factor]
We have used lawyers in the UK and US (for contract advice, that kind of thing) but we don't have one I'd turn to if I were in this position. It's certainly not impossible to reach this point without that kind of advisor around.
[Note: we started in the UK, which could be a factor]
IANAL, and you should get one (see #1) ASAP. But a few observations:
1. Get a startup attorney (you probably already have one, who incorporated you, if you don't - use one of the bigger names (wilson sonsoni, gunderson, cooley))
2. Figure out what your perfect offer would be, and counter
3. Rule #1 of any negotiation is to be willing to walk the fuck away if you're not happy. As soon as you become a little desperate, you've lost leverage.
4. I'm not quite sure how double trigger acceleration works but if you're getting options that vest, you could potentially figure out a way to get all (or some) of your options accelerate if you do get terminated. Usually this applies only on change of control, but I'm sure your attorneys could cook up something.
5. Why do you need to get acquired to work on the million ideas for the future? Have you thought about raising capital to do that (you know, the choice that Foursquare took when it turned down acquisition offers) - raising capital when there's already acquisition interest should be easier if that's the route you want to take and you can take money off the table if you need the cash and still build a potentially massive company. Talk to VCs anyway. This goes back to what you think the size of your opportunity is and how tired you are of going after it.
6. If you do "verbally" accept the offer, make sure you and your attorneys go over the LoI and terms with a fine tooth and comb, you could still get screwed. There's a million ways that could happen and that's where good attorneys will help.
7. Don't panic.
8. Best of luck!
1. Get a startup attorney (you probably already have one, who incorporated you, if you don't - use one of the bigger names (wilson sonsoni, gunderson, cooley))
2. Figure out what your perfect offer would be, and counter
3. Rule #1 of any negotiation is to be willing to walk the fuck away if you're not happy. As soon as you become a little desperate, you've lost leverage.
4. I'm not quite sure how double trigger acceleration works but if you're getting options that vest, you could potentially figure out a way to get all (or some) of your options accelerate if you do get terminated. Usually this applies only on change of control, but I'm sure your attorneys could cook up something.
5. Why do you need to get acquired to work on the million ideas for the future? Have you thought about raising capital to do that (you know, the choice that Foursquare took when it turned down acquisition offers) - raising capital when there's already acquisition interest should be easier if that's the route you want to take and you can take money off the table if you need the cash and still build a potentially massive company. Talk to VCs anyway. This goes back to what you think the size of your opportunity is and how tired you are of going after it.
6. If you do "verbally" accept the offer, make sure you and your attorneys go over the LoI and terms with a fine tooth and comb, you could still get screwed. There's a million ways that could happen and that's where good attorneys will help.
7. Don't panic.
8. Best of luck!
Great points!
#5 is a point here I haven't seen mentioned in the rest of the thread, so take notice! This might be very good advice, depending on your situation: this offer could provide excellent leverage to raise capital at a good valuation right now. Also, I don't think it would risk poisioning the well if you were to talk to VCs the way it might if you were shopping for other buyers.
#5 is a point here I haven't seen mentioned in the rest of the thread, so take notice! This might be very good advice, depending on your situation: this offer could provide excellent leverage to raise capital at a good valuation right now. Also, I don't think it would risk poisioning the well if you were to talk to VCs the way it might if you were shopping for other buyers.
re point 2 - don't make a counter offer, get an offer from another bidder. That is the only way to push your price to the actual market value rather than just find the lowest offer you will accept.
I have been in this position twice before with a services-based consultancy. The first time it was a similar low-ball offer with 50% paid up front and remainder over 4 years as an earn-out. The total deal was for roughly 4x revenues, and was all cash. We actually didn't think it was such a great deal at the time, but we ended up going all the way to closing. Lo and behold, they actually tried to change one of the material terms of the deal AT CLOSING. These folks were not to be trusted at all. We immediately said "GOOD BYE!" and hung up the phone (we were in Switzerland at the time working for a client and actually tried to do the closing virtually). I don't think they expected that we would just walk away if the deal went sour, but they had nickled-and-dimed us so much along the way that the trust was already frayed. By the time we were done, there was no trust left. Without trust, you can't do any deal.
Fortunately, like you, we were already profitable. Almost five years later, we've actually made more money (and pocketed) than we would have gotten in the deal. Meanwhile, the other company has gone belly-up. If we had taken the deal, we would have been screwed.
The other deal was such a stupid lowball, we couldn't even take it seriously. We simply replied, "this is not a good deal. Make us another offer." We felt it would be ridiculous for us to counter offer such a stupid deal that rejecting it out of hand and making them negotiate against themselves was a better option. Needless to say, they didn't make a better deal. Good riddance.
This is a great conversation here (tagged for future reference). For those of us who are trying to learn as much from other startups' experiences, would it be possible to keep us updated (in the same sort of anonymous style you have done here)? It may not be possible, but I'm very interested to hear what you end up doing with this offer.
Fortunately, like you, we were already profitable. Almost five years later, we've actually made more money (and pocketed) than we would have gotten in the deal. Meanwhile, the other company has gone belly-up. If we had taken the deal, we would have been screwed.
The other deal was such a stupid lowball, we couldn't even take it seriously. We simply replied, "this is not a good deal. Make us another offer." We felt it would be ridiculous for us to counter offer such a stupid deal that rejecting it out of hand and making them negotiate against themselves was a better option. Needless to say, they didn't make a better deal. Good riddance.
This is a great conversation here (tagged for future reference). For those of us who are trying to learn as much from other startups' experiences, would it be possible to keep us updated (in the same sort of anonymous style you have done here)? It may not be possible, but I'm very interested to hear what you end up doing with this offer.
After the deal has gone through (or not), it may even be possible the lessen the anonymity. (Just hoping.)
I can't recommend him personally but I'm always stunned by grellas' comments on HN regarding legal stuff (he's a Sillicon Valley business lawyer)[1]. Maybe you could get in touch...
[1] http://news.ycombinator.com/user?id=grellas
[1] http://news.ycombinator.com/user?id=grellas
He just stepped in:
http://news.ycombinator.com/item?id=2154332
http://news.ycombinator.com/item?id=2154332
Step 1: Be sure you and your fellow founders are on the same page. United we stand, divided we... Key areas for agreement are (a) decision to sell, and (b) minimum price you'd accept. Nothing will expose cracks in your team's facade like M&A discussions.
Step 2: Tell the buyer the price they've offered is too low, and offer to explain why. The first offer is just the beginning of the negotiation process. A buyer who is not willing to discuss an offer is not the sort of partner you want to work with. At it's best the negotiation process is a mutual education process, with you explaining your value and them explaining why your value isn't what you thought it was. At the end you'll either agree to disagree or you'll agree. If you agree, you'll do so for the right reasons (i.e., you are both roughly on the same page). While outside advisors can help here, the real work must be done by you, as no one will understand your business and its prospects better than you.
Step 3: Ensure that the deal you've struck is a real deal. If the deal pushes a lot of the pay into the back-end, it is not a real deal. It is an option. Earn-outs and other back-end payment structures can help bridge a disagreement in valuation, so they have their use, but a seller who isn't desperate to sell should ensure that he is happy with the deal even if none of the back-end targets are satisfied. Otherwise he's traded his business for a dodgy option. Rarely a good trade. Here again advisors can be helpful, particularly for tax issues, but usually a good deal is clear enough that you can understand it without the help of advisors.
A good lawyer is essential. A banker less so.
Fred Wilson's blog has had some good posts on M&A recently.
drop me a line. i'm well versed in this process, the current environment, etc.
I'd take that offer in a heartbeat.
Please do this.
Please do this.
Jump on that offer quick.
Shot you an e-mail, hope I got the right address.
Getting a lot of the same questions so I just want to address them.
1) We will not receive another offer, there are no other offers possible. I can't fully explain this without blowing my cover, but suffice it to say we're very confident in this. It revolves around our extremely niche market.
2) A huge part of the reason we're afraid of blowing this deal is what I just stated in #1, since there are really no other exits for us.
What makes us different than another tech startup is that we really are only interesting to a very very few, and this company is the only one who can afford us :)
1) We will not receive another offer, there are no other offers possible. I can't fully explain this without blowing my cover, but suffice it to say we're very confident in this. It revolves around our extremely niche market.
2) A huge part of the reason we're afraid of blowing this deal is what I just stated in #1, since there are really no other exits for us.
What makes us different than another tech startup is that we really are only interesting to a very very few, and this company is the only one who can afford us :)
Reading between the lines, it sounds as if your market might have some overlap with, or technical dependency on, the acquirer's market and ecosystem--perhaps even only allowed to thrive at their pleasure. From the acquirer's motivation, it could be that they're trying to fill a niche they have no desire to invest in organically, especially if there's not a lot of growth in that niche.
If it's as you say, I think the question to answer is "Can we stand to be employees again, in particular, as employees of this company?" If you can, then this starts to look more like a job offer, in which case you need to negotiate more cash up front and more favorable vesting terms. (This may also explain why the future employer says the tone will change if bankers get involved. They probably see this as a talent acquisition with revenue attached. Getting a lawyer involved makes sense no matter what.)
If you can't see yourself as an employee, then my guess is that you're fearful that your market is going to go away (and the acquirer may suspect that you're road kill). In which case the thing to do is start trying to diversify outside the niche as the current niche revenue stream winds down. Is there time to do that?
End of rampant speculation. Good luck.
If it's as you say, I think the question to answer is "Can we stand to be employees again, in particular, as employees of this company?" If you can, then this starts to look more like a job offer, in which case you need to negotiate more cash up front and more favorable vesting terms. (This may also explain why the future employer says the tone will change if bankers get involved. They probably see this as a talent acquisition with revenue attached. Getting a lawyer involved makes sense no matter what.)
If you can't see yourself as an employee, then my guess is that you're fearful that your market is going to go away (and the acquirer may suspect that you're road kill). In which case the thing to do is start trying to diversify outside the niche as the current niche revenue stream winds down. Is there time to do that?
End of rampant speculation. Good luck.
Wild guessing here, but it is also possible that they are just trying to take your product off the market. Have you considered this?
I guess what you're saying is that keeping this as a lifestyle business is not attractive to you. I'm not sure why not, but let's go with that. How about selling it to someone who does want a lifestyle business? They can probably get a bank loan to buy you out, or they can pay you an annuity, or some combination of those. There are people who would be thrilled to do that (someone here has already expressed interest).
Based on these statements, and the very low offer, I have to conclude your business is about to collapse. You have no leverage if you have no options. If 3x over 4 years sounds good, you are already conceding that the company is doomed. Selling a doomed company for before it's bankrupt is wise. You have no other acquisition prospects and you business is about to start shrinking - I suppose you should take what you can get.
Edit: Sorry I must be tired. This is a revenue multiple not income. Revenue multiples are not particularly helpful in valuing a company with a mature business model. Gross profit would be far more useful.
At 20% margin this is 15x gross profit which is reasonable, particularly if you have no other exits.
I'd take the offer after cleaning up the vesting (at least 50% should be immediate) and consulting a good lawyer who might find some fallback options.
Edit: Sorry I must be tired. This is a revenue multiple not income. Revenue multiples are not particularly helpful in valuing a company with a mature business model. Gross profit would be far more useful.
At 20% margin this is 15x gross profit which is reasonable, particularly if you have no other exits.
I'd take the offer after cleaning up the vesting (at least 50% should be immediate) and consulting a good lawyer who might find some fallback options.
Congrats!
I think that you can be upfront with them.
"Look, there are a couple of things that make us uneasy about this deal. Mainly, we feel the offer is a little low and that the vesting schedule is a little long. The combination of the two makes this a very difficult deal to consider. I am not saying we don't want to consider it, but just that since we assume you are wanting to work with us for at least the next 4 years, we might want to spend some time to make sure we get started with the best chance of long term success."
I think that is both honest and strong negotiation.
I think that you can be upfront with them.
"Look, there are a couple of things that make us uneasy about this deal. Mainly, we feel the offer is a little low and that the vesting schedule is a little long. The combination of the two makes this a very difficult deal to consider. I am not saying we don't want to consider it, but just that since we assume you are wanting to work with us for at least the next 4 years, we might want to spend some time to make sure we get started with the best chance of long term success."
I think that is both honest and strong negotiation.
That's pretty good.
Instead of "a little low", say "low". Instead of "a little long", say "long". Don't qualify. That way it's even stronger.
"We feel the offer is too low and that the vesting schedule is too long."
Instead of "a little low", say "low". Instead of "a little long", say "long". Don't qualify. That way it's even stronger.
"We feel the offer is too low and that the vesting schedule is too long."
Ok, I'll bite. Say "extremely low considering <specific information about your revenue that can justify a higher valuation>" and "well beyond the length we'd be willing to do because we've already spent N years at this and have built value you'd be getting on day one."
Here are questions I'd think about:
* Why are they interested in your company? If it's technology, would others be interested in the same technology? What are alternatives to your tech? Scarcity and competition will drive up prices. A good investment banker can help you identify these opportunities and get the most out of your situation. If it's for the market opportunity, you want to consider the buy-it versus build-it quandary they are evaluating and keep this in mind as you negotiate.
* Are you through the risky part of you business? When you start a new venture, there is a huge amount of risk you are assuming, particularly on the front that the business will actually work. If you've proven the business will work for your customers and the business model will be profitable, you're in a much higher position of leverage. If your business is not clear of risk yet, you should keep this in mind.
* What is your chance of success at this company and how will it affect how much cash you'll be able to extract from the deal/stocks? Will you be caught up with red tape? Is it going to be like delicious at Yahoo? Will you have control over your future?
* Are you planning for the worst case scenario? If they could fire you on day 2 and leave you with almost nothing, I'd never agree to it. Contracts and agreements should be planned with the mindset that if things can go wrong, they will go wrong.
* How can you get more money sooner? A mostly stock deal that was vested over 4 years the deal seems crazy for me personally unless it'll set you up for life. You've gotten a taste of entrepreneurship. You have been genetically mutated forever and will never be normal again. You'll likely get the bug to start something else in a year or 2... or sooner so keep that into account when thinking through the deal.
Good luck.
* Why are they interested in your company? If it's technology, would others be interested in the same technology? What are alternatives to your tech? Scarcity and competition will drive up prices. A good investment banker can help you identify these opportunities and get the most out of your situation. If it's for the market opportunity, you want to consider the buy-it versus build-it quandary they are evaluating and keep this in mind as you negotiate.
* Are you through the risky part of you business? When you start a new venture, there is a huge amount of risk you are assuming, particularly on the front that the business will actually work. If you've proven the business will work for your customers and the business model will be profitable, you're in a much higher position of leverage. If your business is not clear of risk yet, you should keep this in mind.
* What is your chance of success at this company and how will it affect how much cash you'll be able to extract from the deal/stocks? Will you be caught up with red tape? Is it going to be like delicious at Yahoo? Will you have control over your future?
* Are you planning for the worst case scenario? If they could fire you on day 2 and leave you with almost nothing, I'd never agree to it. Contracts and agreements should be planned with the mindset that if things can go wrong, they will go wrong.
* How can you get more money sooner? A mostly stock deal that was vested over 4 years the deal seems crazy for me personally unless it'll set you up for life. You've gotten a taste of entrepreneurship. You have been genetically mutated forever and will never be normal again. You'll likely get the bug to start something else in a year or 2... or sooner so keep that into account when thinking through the deal.
Good luck.
"has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it."
This sounds like a negotiating trick. The truth is, they are not offering to buy your company as a favor to you. They are offering to buy your company because they want it. They are also not going to offer you the maximum price that they are willing to pay right at the beginning. If you just said "no" and walked away, I would bet that they wouldn't just let you walk away. They would start to negotiate. Everyone is willing to negotiate for something that they want.
This sounds like a negotiating trick. The truth is, they are not offering to buy your company as a favor to you. They are offering to buy your company because they want it. They are also not going to offer you the maximum price that they are willing to pay right at the beginning. If you just said "no" and walked away, I would bet that they wouldn't just let you walk away. They would start to negotiate. Everyone is willing to negotiate for something that they want.
You need an experienced hand to help you with this. Don't do these negotiations yourself. You aren't objective. Think of it from this perspective, this is probably your biggest asset and if executed on properly an acquisition will provide for you and your family for the rest of your life. So bring in an expert. When selling a house, you use a realtor, when selling a company use a banker. My personal friend on banker is Mike Lyon with Vistapoint Advisors. But find a referral out of your own network so you are comfortable or call Mike.
I'd say definitely delete this thread. You are showing the other side all of your cards.
This looks like classical negotiation tactics from people knowing how to play hardball. They try to take control of the situation by setting limits to the offer.
YOU DON'T HAVE TO ACCEPT THESE LIMITS !!! THIS IS A CLASSICAL NEGOTIATION TRAP NEWBIES FALL INTO !!! THEY WILL TRY TO MAKE YOU BELIEVE THAT SURRENDERING TO ANY OF YOUR COUNTER REQUESTS IS A VALUABLE CONCESSION. IT IS NOT. THEY HAVE SET THE OFFER FAR TOO LOW FOR THAT SPECIFIC REASON !!! DON'T FUCKING BUY IT !!!
Guys, you have to learn to play bitches: i) be very patient (time is on your side, you are profitable), ii) talk to other interested parties (i.e. confront the offers to raise the price, and yes I mean multiple rounds; one shark smell blood? get more sharks in the pond! now is the right time!!), iii) don't show you cards, reveal your intentions or commit now, because you are in the process of finding what your intentions are and it depends of theirs too, iv) set YOUR own rules ON THEM whenever necessary (have no hard feelings about it, because they don't have any for you by making a low offer; from your own description, they are not being nice to you), v) never ever buy into whining and strong or manipulative emotions from other parties, they know how to play bitches like you don't (and sometimes, bitches fake friendship, caring and honesty very well; they send the nicest guy/lady, the one that has the highest chance to win your sympathy; it is nothing more than fucking smoke to get a better deal than they actually deserve; YOU did the hard work).
If you don't feel comfortable enough, find an independent professional negotiator with strong AND proven experience who can do that job for you. Discuss the limits within which you are ready to sell and list what you consider acceptable and unacceptable terms. Be honest and candid about it, no early concessions. Then, (re)open discussions starting with the double (at least).
Reward the negotiator with a percentage of the deal. Pay him well, because he/she will obtain a value that you will never ever be able to obtain yourself considering your experience in negotiations.
The hardest thing to understand (or to remember) is that 'no deal' is better than a 'bad deal' in your case. You must be ready to consider that option as the best option, especially if there is no zone of possible agreement between you and the other parties. Negotiating IS PRECISELY about finding out if there is such a zone.
And don't listen to those saying you should turn the offer down because 20% 'is an insult'. They are ignorant morons of no value (really). Now is SURELY NOT the time to quit discussions.
You are in the power position, but you don't act like you know it, or that you know how to play it. Take your time. Buy no drama. No rush. Let your brains run this show, not your hormones.
YOU DON'T HAVE TO ACCEPT THESE LIMITS !!! THIS IS A CLASSICAL NEGOTIATION TRAP NEWBIES FALL INTO !!! THEY WILL TRY TO MAKE YOU BELIEVE THAT SURRENDERING TO ANY OF YOUR COUNTER REQUESTS IS A VALUABLE CONCESSION. IT IS NOT. THEY HAVE SET THE OFFER FAR TOO LOW FOR THAT SPECIFIC REASON !!! DON'T FUCKING BUY IT !!!
Guys, you have to learn to play bitches: i) be very patient (time is on your side, you are profitable), ii) talk to other interested parties (i.e. confront the offers to raise the price, and yes I mean multiple rounds; one shark smell blood? get more sharks in the pond! now is the right time!!), iii) don't show you cards, reveal your intentions or commit now, because you are in the process of finding what your intentions are and it depends of theirs too, iv) set YOUR own rules ON THEM whenever necessary (have no hard feelings about it, because they don't have any for you by making a low offer; from your own description, they are not being nice to you), v) never ever buy into whining and strong or manipulative emotions from other parties, they know how to play bitches like you don't (and sometimes, bitches fake friendship, caring and honesty very well; they send the nicest guy/lady, the one that has the highest chance to win your sympathy; it is nothing more than fucking smoke to get a better deal than they actually deserve; YOU did the hard work).
If you don't feel comfortable enough, find an independent professional negotiator with strong AND proven experience who can do that job for you. Discuss the limits within which you are ready to sell and list what you consider acceptable and unacceptable terms. Be honest and candid about it, no early concessions. Then, (re)open discussions starting with the double (at least).
Reward the negotiator with a percentage of the deal. Pay him well, because he/she will obtain a value that you will never ever be able to obtain yourself considering your experience in negotiations.
The hardest thing to understand (or to remember) is that 'no deal' is better than a 'bad deal' in your case. You must be ready to consider that option as the best option, especially if there is no zone of possible agreement between you and the other parties. Negotiating IS PRECISELY about finding out if there is such a zone.
And don't listen to those saying you should turn the offer down because 20% 'is an insult'. They are ignorant morons of no value (really). Now is SURELY NOT the time to quit discussions.
You are in the power position, but you don't act like you know it, or that you know how to play it. Take your time. Buy no drama. No rush. Let your brains run this show, not your hormones.
Listen to this guy. I've been lucky enough to go through this process before, and patience and confidence that it will be alright if the deal falls through is your best asset. Keep a cool head, keep running your business well, and remember that their initial offer that you've received is likely nothing like the final offer you will have on the table if you negotiate based upon this confidence.
I definitely would say be careful about "shopping around" as others have said -- this can be effective but often times as long as the other party knows that you're capable of shopping around successfully this can apply just as much pressure without poisioning the well of the negotiations. If you're shopping around, it's hard to tell the person who is looking to buy you that you sincerely think they are the best place for you to continue on your startup's mission.
On the terms themselves: first, make sure you have something in there that will accelerate if you get terminated without cause. This is pretty much standard. Second, having no realized stock or cash at close is absolutely insane, particularly if you have a profitable business that has been around for 5 years and you're expected to stick around for 4 years. Make it clear that if you really are going to give them your business and also 4 more years of your time you expect to be well compensated at close and over those 4 years.
I definitely would say be careful about "shopping around" as others have said -- this can be effective but often times as long as the other party knows that you're capable of shopping around successfully this can apply just as much pressure without poisioning the well of the negotiations. If you're shopping around, it's hard to tell the person who is looking to buy you that you sincerely think they are the best place for you to continue on your startup's mission.
On the terms themselves: first, make sure you have something in there that will accelerate if you get terminated without cause. This is pretty much standard. Second, having no realized stock or cash at close is absolutely insane, particularly if you have a profitable business that has been around for 5 years and you're expected to stick around for 4 years. Make it clear that if you really are going to give them your business and also 4 more years of your time you expect to be well compensated at close and over those 4 years.
> Second, having no realized stock or cash at close is absolutely insane
Yes, especially given the situation as described.
There is an enormous amount of really good stuff in this thread if I get around to it I'll summarize it in to an article, it's quite the goldmine.
Yes, especially given the situation as described.
There is an enormous amount of really good stuff in this thread if I get around to it I'll summarize it in to an article, it's quite the goldmine.
Please, please do. I will read it.
Agreed on quite a few of these points.
> 3x multiple of revenues
Yes but what is your growth rate of you / your sector. If revenues are set to double next year, the multiple will be higher.
> the offer is low by about 20%
Don't accept the offer. "We don't go back and forth on it" is equivalent to "We think you are naive and will accept the first offer on the table." Also you are right not to value stock as highly as cash. If the offer is stock, heavily discount it, or refuse the stock and accept cash only.
Yes but what is your growth rate of you / your sector. If revenues are set to double next year, the multiple will be higher.
> the offer is low by about 20%
Don't accept the offer. "We don't go back and forth on it" is equivalent to "We think you are naive and will accept the first offer on the table." Also you are right not to value stock as highly as cash. If the offer is stock, heavily discount it, or refuse the stock and accept cash only.
I recommend that any decision you make should be within a regret minimization framework. For each decision you could take think of the worst case scenario and go in with the full acceptance that this scenario can really happen. The things you might regret are.
* Not taking the deal when it was presented * Taking a deal where the valuation was low * Not being able to work on your ideas * Being cheated * Regrets that go with being employed(there are limitations) * Being stuck in a bad situation for 4 years
As far as the specific circumstances you mention, the deal somehow sounds dodgy, what with them controlling the vesting period and having the ability to terminate your employment as well.
One real possibility is not selling, because you already have a pretty good idea of how the future is going to be down this path and from your post, you seem to be happy where you are. Another factor you might consider here is, How long would it take, for you to accumulate personal wealth at a similar level to what you get from being acquired and what is the level of independence you'll have to work on your ideas.
* Not taking the deal when it was presented * Taking a deal where the valuation was low * Not being able to work on your ideas * Being cheated * Regrets that go with being employed(there are limitations) * Being stuck in a bad situation for 4 years
As far as the specific circumstances you mention, the deal somehow sounds dodgy, what with them controlling the vesting period and having the ability to terminate your employment as well.
One real possibility is not selling, because you already have a pretty good idea of how the future is going to be down this path and from your post, you seem to be happy where you are. Another factor you might consider here is, How long would it take, for you to accumulate personal wealth at a similar level to what you get from being acquired and what is the level of independence you'll have to work on your ideas.
Why would you think about taking an offer where they can fire you and keep the company?
I only have limited experience with things like this, but my advice would be to not let them pressure you into anything.
As a rule of thumb though, you probably won't be able negotiate a good deal unless you're willing to walk away from it. They will have way more leverage over you if they know you are desperate to sell.
When negotiating, I find it very helpful to switch positions and think about it from the opposing perspective. What are their motivations for acquiring your company? What is it worth to them? How much do they want your company? Could they easily acquire someone else or duplicate the same functionality. Knowing the answers to these questions and gathering as much relevant information from them can help you gain more bargaining power. Ideally, you want to sell your company at what it is worth to them, and not you, because there could be a gap in your favor.
As a rule of thumb though, you probably won't be able negotiate a good deal unless you're willing to walk away from it. They will have way more leverage over you if they know you are desperate to sell.
When negotiating, I find it very helpful to switch positions and think about it from the opposing perspective. What are their motivations for acquiring your company? What is it worth to them? How much do they want your company? Could they easily acquire someone else or duplicate the same functionality. Knowing the answers to these questions and gathering as much relevant information from them can help you gain more bargaining power. Ideally, you want to sell your company at what it is worth to them, and not you, because there could be a gap in your favor.
Someone here derided the idea of declining to do business with people you don't trust: "...modern financial and legal infra-structure is designed so that we can make business with people we don't trust."
Since the beginning of mankind the world has been full of people who will take advantage of others who are not as smart or experienced or powerful as they are.
It's not always easy to discern these kinds of people. Some are very smooth and skilled manipulators. You describe yourselves as "young founders". I suggest you seek out someone "old" (over 50) who you know well and whose judgement you trust, and ask them for counsel. I'm not necessarily referring to business or legal counsel, I'm talking about someone who's been around the mountain enough times that they can discern when someone is trying to blow smoke up your dress. It should be someone who has your best interest at heart. Maybe your own father or grandfather might be a good choice.
I am not being condescending about you being young and inexperienced. Nobody is born knowing everything. I'm old now, but I was young once, and I remember how it was. Get someone with the long fangs of many years who is on your side. Bring him to meetings with this company's people, introduce him simply as one of your "advisors". He doesn't need to say anything in the meetings, he may just observe and listen, and perhaps ask a few questions which unmask any propaganda.
I've been doing consulting for 30 years. When contemplating a job, if I don't have enough trust in the client's integrity (and he in me) that I feel we could do the deal on nothing more than a handshake, I'll walk away. For most jobs I do have a paper contract, because having things written down is good, but I don't expect any contract to turn a snake into a good guy.
If someone is intent on cheating you, all the contracts in the world aren't going to make much difference.
Over the years I've ignored my snake radar a few times, and in each case I regretted it.
Any contract must be equitable. What you've described so far sounds rather inequitable. Consider what that might indicate about the integrity and good faith of your potential purchasers.
As someone else here said, a bad deal is far worse than no deal. You may think this is the only offer you will ever get, but you don't know that. Many amazing things can happen in life which you would never have imagined.
Since the beginning of mankind the world has been full of people who will take advantage of others who are not as smart or experienced or powerful as they are.
It's not always easy to discern these kinds of people. Some are very smooth and skilled manipulators. You describe yourselves as "young founders". I suggest you seek out someone "old" (over 50) who you know well and whose judgement you trust, and ask them for counsel. I'm not necessarily referring to business or legal counsel, I'm talking about someone who's been around the mountain enough times that they can discern when someone is trying to blow smoke up your dress. It should be someone who has your best interest at heart. Maybe your own father or grandfather might be a good choice.
I am not being condescending about you being young and inexperienced. Nobody is born knowing everything. I'm old now, but I was young once, and I remember how it was. Get someone with the long fangs of many years who is on your side. Bring him to meetings with this company's people, introduce him simply as one of your "advisors". He doesn't need to say anything in the meetings, he may just observe and listen, and perhaps ask a few questions which unmask any propaganda.
I've been doing consulting for 30 years. When contemplating a job, if I don't have enough trust in the client's integrity (and he in me) that I feel we could do the deal on nothing more than a handshake, I'll walk away. For most jobs I do have a paper contract, because having things written down is good, but I don't expect any contract to turn a snake into a good guy.
If someone is intent on cheating you, all the contracts in the world aren't going to make much difference.
Over the years I've ignored my snake radar a few times, and in each case I regretted it.
Any contract must be equitable. What you've described so far sounds rather inequitable. Consider what that might indicate about the integrity and good faith of your potential purchasers.
As someone else here said, a bad deal is far worse than no deal. You may think this is the only offer you will ever get, but you don't know that. Many amazing things can happen in life which you would never have imagined.
Hire an M&A Attorney with experience in this type of deal. Don't waste another femtosecond of time on this, or any other board.
"We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us."
Pretty sure that's why the person is posting, just a wild guess.
Pretty sure that's why the person is posting, just a wild guess.
Don't be afraid to counter, make it what YOU want, plus a bit.
You should have some amount of guaranteed cash at closing, plus earn-out, plus stock, plus a clause for at least some kind of acceleration if your employment is terminated for any reason.
You should have some amount of guaranteed cash at closing, plus earn-out, plus stock, plus a clause for at least some kind of acceleration if your employment is terminated for any reason.
Ask for double of what you would accept, not just a bit more.
Agreed, make an outrageous counter offer, you know, cost of living and all that. The reaction will shed some light on where they really stand.
Double of what you want isn't outrageous :) 10x would be. Double let's them make a lower counteroffer that you're both happy with.
Lawyers/bankers/third-parties people can and do very frequently kill deals. Do not hand the discussions off to them. Yes, in some cases a third party negotiator can help a lot. In this case though it's probably too likely they'd piss off the buyer and make them walk.
Just tell the buyer you want a deal that you won't regret, and what that means. It's really that simple. Once you get to the point where you're happy stop pushing for more unless you're truly okay with the buyer walking away.
Just tell the buyer you want a deal that you won't regret, and what that means. It's really that simple. Once you get to the point where you're happy stop pushing for more unless you're truly okay with the buyer walking away.
They'll need a lawyer backing them up just to make sure they don't sign something really stupid. No way should they proceed without legal backup.
Agreed on the bankers, they can and do kill deals, I've seen that happen up close. Oh, and they did get paid.
Agreed on the bankers, they can and do kill deals, I've seen that happen up close. Oh, and they did get paid.
Absolutely get a lawyer and/or banker involved on your side, just be there to control all their interactions with the other side.
I don't have any experience involving bankers in a M&A deal but it's important that you monitor the work your lawyer(s) are doing pretty closely. Even good lawyers will have a tendency to want to refine the contract past the point of diminishing returns or go off and do random tasks in order to pad their hourly fees.
You can potentially get them to agree to a fee cap for the deal, but unless there's other reasons for them to want to do a thorough job (like future business with your acquirer, etc.) it'll probably do more harm than good.
All that said, you'd be absolutely mad to not have good lawyers on a deal like this. All it takes is one booby trap in your contract for all your hard work to get flushed down the toilet.
You can potentially get them to agree to a fee cap for the deal, but unless there's other reasons for them to want to do a thorough job (like future business with your acquirer, etc.) it'll probably do more harm than good.
All that said, you'd be absolutely mad to not have good lawyers on a deal like this. All it takes is one booby trap in your contract for all your hard work to get flushed down the toilet.
Bootstrapped and highly profitable after only 5 years with an 8-figure deal on the table? Enviable, my friend.
>>In the worst case, they could fire us on day #2 and we'd have only the token money we got up front to show for it.
If you're 'highly profitable', it hardly seems worth that risk.
>>In the worst case, they could fire us on day #2 and we'd have only the token money we got up front to show for it.
If you're 'highly profitable', it hardly seems worth that risk.
umm ...
The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it. Truthfully I believe we would accept the current offer but it'd be a begrudging acceptance and I think it would leave a bad taste in the founders mouth.
... that's nonsense they are just strong-arming you.
Like cperciva - there is not way you don't guarantee the money. Besides we're about to begin a golden period of irrational greed. Why sell now. Wait a year or two for Facebook and other IPOs.
You've done the hard part and are profitable. All you have to do is hang on till next bubble and make 10 times what you're being offered now - at least half of it in cash.
Seriously, stop being desperate
The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it. Truthfully I believe we would accept the current offer but it'd be a begrudging acceptance and I think it would leave a bad taste in the founders mouth.
... that's nonsense they are just strong-arming you.
Like cperciva - there is not way you don't guarantee the money. Besides we're about to begin a golden period of irrational greed. Why sell now. Wait a year or two for Facebook and other IPOs.
You've done the hard part and are profitable. All you have to do is hang on till next bubble and make 10 times what you're being offered now - at least half of it in cash.
Seriously, stop being desperate
> we've received a low 8 figure verbal offer over the phone today.
Try to get something on paper.
> they could fire us on day #2 and we'd have only the token money we got up front to show for it.
That's something you should take care of contractually.
> the offer is low by about 20% from what would make us "happy" to sell for.
20% is not a whole lot to be off for an opening offer, but keep in mind that if you go for broke you might end with nothing.
> We're very excited (indescribably so) at the prospect, we love the company and really want to make a deal and start working on the million ideas we have for the future - but at the same time we are afraid of cutting a deal now that we'll be second guessing ourself on for 4 years.
How long before the next offer comes along?
Will it be a better one?
Will this offer stand?
Are you the next twitter or are you operating in a space with competition? This matters a lot in your risk assessment.
> The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it.
I would say that :) That doesn't mean it's true. But it does mean that they want to pressure you a bit and apparently that is working.
Keep your head cool.
Don't sign anything on the spot ever, always think it over, always have it reviewed. Be as cool as you can be and don't allow yourself to be pressured.
> We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us. They basically have all told us it's ridiculous we've come this far without getting an LOI already, and the purchaser has basically said they don't issue LOIs until the terms are agreed on in principle.
That makes good sense but even a letter of intent is essentially meaningless. Even a term sheet is meaningless. The only document that really matter is the final contract, and only then when it has been signed.
> So anyhow, what next?
Get a really good lawyer! An experienced one and one that will not blink on doing a deal like this (as in, that has done multiple deals like this and comes with very solid references). Deals like this happen only a few times in a lifetime, don't be cheap, that might come back to bite you big time.
> They are waiting on our go-ahead to put together an LOI.
Get a lawyer.
> Counter immediately?
Get a lawyer.
> Is it stupid to be afraid of "ruining" a deal?
No, not at all, that actually happens. Don't ruin it!
> Should we involve our attorney?
YES!
If you end up with a deal on the table after negotiations are finished and you don't like it walk away.
Treat it as a learning experience up to that point and only sign if you are 100% sure that it's a good deal for you and your buddies.
Good luck!
Try to get something on paper.
> they could fire us on day #2 and we'd have only the token money we got up front to show for it.
That's something you should take care of contractually.
> the offer is low by about 20% from what would make us "happy" to sell for.
20% is not a whole lot to be off for an opening offer, but keep in mind that if you go for broke you might end with nothing.
> We're very excited (indescribably so) at the prospect, we love the company and really want to make a deal and start working on the million ideas we have for the future - but at the same time we are afraid of cutting a deal now that we'll be second guessing ourself on for 4 years.
How long before the next offer comes along?
Will it be a better one?
Will this offer stand?
Are you the next twitter or are you operating in a space with competition? This matters a lot in your risk assessment.
> The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it.
I would say that :) That doesn't mean it's true. But it does mean that they want to pressure you a bit and apparently that is working.
Keep your head cool.
Don't sign anything on the spot ever, always think it over, always have it reviewed. Be as cool as you can be and don't allow yourself to be pressured.
> We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us. They basically have all told us it's ridiculous we've come this far without getting an LOI already, and the purchaser has basically said they don't issue LOIs until the terms are agreed on in principle.
That makes good sense but even a letter of intent is essentially meaningless. Even a term sheet is meaningless. The only document that really matter is the final contract, and only then when it has been signed.
> So anyhow, what next?
Get a really good lawyer! An experienced one and one that will not blink on doing a deal like this (as in, that has done multiple deals like this and comes with very solid references). Deals like this happen only a few times in a lifetime, don't be cheap, that might come back to bite you big time.
> They are waiting on our go-ahead to put together an LOI.
Get a lawyer.
> Counter immediately?
Get a lawyer.
> Is it stupid to be afraid of "ruining" a deal?
No, not at all, that actually happens. Don't ruin it!
> Should we involve our attorney?
YES!
If you end up with a deal on the table after negotiations are finished and you don't like it walk away.
Treat it as a learning experience up to that point and only sign if you are 100% sure that it's a good deal for you and your buddies.
Good luck!
A lawyer isn't the answer for everything.
Get an investment banker who has M&A experience, or alternately management consultant who can argue with the acquirer about the valuation.
Get an investment banker who has M&A experience, or alternately management consultant who can argue with the acquirer about the valuation.
A lawyer you can typically hire on an hourly basis, and on reasonably short notice, an investment banker will likely want to become a part of the deal. A (good) lawyer will likely also have a considerable network of contacts one of which might be suitable as a lead negotiator.
> Get an investment banker who has M&A experience
That's a possibility but a far more complicated one and it will take quite a bit of time to find a decent one. But it would be a good choice if they have a good rep and can be easily found, my personal experience with investment bankers is an extremely mixed bag.
> alternately management consultant who can argue with the acquirer about the valuation.
That would be useful anyway, but there will be time enough for that, after all if a deal this size goes through there will be up to a month of hammering out the details of the deal as well as due diligence.
If they're 'in the ballpark' then you could simply respond with a counter off offer a bit higher than what is acceptable to you to build in some room.
Then use your own cut off value to guide a walk-away decision.
> Get an investment banker who has M&A experience
That's a possibility but a far more complicated one and it will take quite a bit of time to find a decent one. But it would be a good choice if they have a good rep and can be easily found, my personal experience with investment bankers is an extremely mixed bag.
> alternately management consultant who can argue with the acquirer about the valuation.
That would be useful anyway, but there will be time enough for that, after all if a deal this size goes through there will be up to a month of hammering out the details of the deal as well as due diligence.
If they're 'in the ballpark' then you could simply respond with a counter off offer a bit higher than what is acceptable to you to build in some room.
Then use your own cut off value to guide a walk-away decision.
I've done a deal like this. You need a team. First you need a consultant who specialises in this sort of transaction. Interview a bunch of them and be willing to pay a few percent of the proceeds as a success fee.
You will also need a lawyer, a specialist tax accountant, personal accountant, etc.
Right now you are at the non-binding offer stage. This is when you shape the deal and negotiate the overall price. Your aim is to not only maximise the sale price but also manage risk by maximising up front cash and minimising proceeds which are dependent on future performance (earn-out). Others have commented on this stage. My advice is to create a formal process - step back and spend a couple of months creating an 'information memorandum' and get it to a bunch of prospective buyers. The only way to get the best deal is to get multiple offers.
Now here is the most important thing I have to say. Negotiating the deal is the easy bit. I repeat - the easy bit. You have to do due diligence and negotiate the long-form contracts. If you get this wrong, the deal rapidly become much less attractive. This is where both your sale consultant and lawyer are critical, but you'll have plenty of work to do too!
Start thinking about due diligence right now. Will your business stand microscopic scrutiny? Do you meet all accounting standards, relevant business regulations, etc. The better the deal you negotiate, the harder you'll be pressed in due diligence. And remember you need to be 100% truthful because the contracts will contain clauses that you won't want invoked if you provide any incorrect information.
The only really important advice you should take from an online forum is to hire great consultants now. Only deal with genuine experts who have real experience with similar transactions. Be prepared to pay high fees, the right people will be worth it!
You will also need a lawyer, a specialist tax accountant, personal accountant, etc.
Right now you are at the non-binding offer stage. This is when you shape the deal and negotiate the overall price. Your aim is to not only maximise the sale price but also manage risk by maximising up front cash and minimising proceeds which are dependent on future performance (earn-out). Others have commented on this stage. My advice is to create a formal process - step back and spend a couple of months creating an 'information memorandum' and get it to a bunch of prospective buyers. The only way to get the best deal is to get multiple offers.
Now here is the most important thing I have to say. Negotiating the deal is the easy bit. I repeat - the easy bit. You have to do due diligence and negotiate the long-form contracts. If you get this wrong, the deal rapidly become much less attractive. This is where both your sale consultant and lawyer are critical, but you'll have plenty of work to do too!
Start thinking about due diligence right now. Will your business stand microscopic scrutiny? Do you meet all accounting standards, relevant business regulations, etc. The better the deal you negotiate, the harder you'll be pressed in due diligence. And remember you need to be 100% truthful because the contracts will contain clauses that you won't want invoked if you provide any incorrect information.
The only really important advice you should take from an online forum is to hire great consultants now. Only deal with genuine experts who have real experience with similar transactions. Be prepared to pay high fees, the right people will be worth it!
Read the recent article M&A Case Studies: WhatCounts Sale Process : http://www.avc.com/a_vc/2011/01/ma-case-studies-whatcounts-s...
If you are highly profitable, why sell at all? Use the $ to to allow you to focus on other things you want to do and keep that golden egg laying duck in house.
The vesting over 4 years is long by industry standards; understandable though if the buyer really wants to keep the founders on board. If you lose key people after acquisition, you might as well not have bought the company. I suspect the buyer got burnt on this in the past, and now compensates with very long vesting periods.
Creating an impression that "the first offer is the final offer" can safely be assumed to be negotiation tactics. This is what they are paid for; the people you're talking to do this sort of negotiation all the time. You are fencing with someone that has practiced this for years, and they have much less to lose than you. Do not assume malice, just assume that their job is to get a good deal for their employer.
Be frank: Tell them what you think the value of the company actually is. An M&A deal is like getting married: If you don't feel that it's the happiest day of your life when you sign your company over, you probably shouldn't do it. A little bit of cold feet is to be expected, but generally you should -not- enter a deal where you have a bitter taste in your mouth. That would do neither you (nor the potential buyer) any good.
Get yourself advisors (experienced ones, preferably); but be careful: Keep their incentive structure in mind. Some have a lot less to lose than you (e.g. if the deal breaks apart, they lose a couple of hours of work), but can often gain much more from risk-taking (as they usually want a percentage of the proceeds).
Your impression that a lot of advisors seem like they have something to sell to you is correct, because they do. Finding one that you deem trustworthy is important; personal connections are usually more helpful than shopping around.
It is not unheard of to not get the LOI before the basic terms are agreed upon. The buyer wants to avoid giving you something in writing that you could use to shop around.
Good luck !
Creating an impression that "the first offer is the final offer" can safely be assumed to be negotiation tactics. This is what they are paid for; the people you're talking to do this sort of negotiation all the time. You are fencing with someone that has practiced this for years, and they have much less to lose than you. Do not assume malice, just assume that their job is to get a good deal for their employer.
Be frank: Tell them what you think the value of the company actually is. An M&A deal is like getting married: If you don't feel that it's the happiest day of your life when you sign your company over, you probably shouldn't do it. A little bit of cold feet is to be expected, but generally you should -not- enter a deal where you have a bitter taste in your mouth. That would do neither you (nor the potential buyer) any good.
Get yourself advisors (experienced ones, preferably); but be careful: Keep their incentive structure in mind. Some have a lot less to lose than you (e.g. if the deal breaks apart, they lose a couple of hours of work), but can often gain much more from risk-taking (as they usually want a percentage of the proceeds).
Your impression that a lot of advisors seem like they have something to sell to you is correct, because they do. Finding one that you deem trustworthy is important; personal connections are usually more helpful than shopping around.
It is not unheard of to not get the LOI before the basic terms are agreed upon. The buyer wants to avoid giving you something in writing that you could use to shop around.
Good luck !
Btw, before I forget:
- Counteroffer. Seriously. - If you're profitable and can keep on going, make this -very- transparent to the people approaching you. - "No deal is better than a bad deal" is very true. Make sure the deal makes you happy. - Having an experienced negotiator along is going to make this a lot less nerve-wrecking. Try finding one, somehow.
- Counteroffer. Seriously. - If you're profitable and can keep on going, make this -very- transparent to the people approaching you. - "No deal is better than a bad deal" is very true. Make sure the deal makes you happy. - Having an experienced negotiator along is going to make this a lot less nerve-wrecking. Try finding one, somehow.
All other advice aside, any vesting stock should accelerate upon termination. ie. You only lose stock if you walk away. They fire you, you vest 100%. Anything less is an invitation to be robbed.
Never rush into any decision because the buyer told you that they are not going to negotiate ... they all put on a poker face playing the game. Your business is highly profitable while on paper their offer isn't really that exciting. I think there is plenty room for negotiation.
It's typical for the other side to open negotiations with crummy conditions, not different from what happens millions of times a day in bazars all over the world.
I would venture a guess, that the potential buyer is aware of your inexperience, and trying to pull one on you.
Don't let them FUD you with comments like 'changing the tone' once legal representation gets involved. They clearly seem to have invested time and effort to vet the deal, so you very likely have a strong position.
I'd take my time, as excited as you might be, don't get desperate, and try to find a good M&A lawyer to provide you with guidance. Ask for referrals from people you trust.
I would venture a guess, that the potential buyer is aware of your inexperience, and trying to pull one on you.
Don't let them FUD you with comments like 'changing the tone' once legal representation gets involved. They clearly seem to have invested time and effort to vet the deal, so you very likely have a strong position.
I'd take my time, as excited as you might be, don't get desperate, and try to find a good M&A lawyer to provide you with guidance. Ask for referrals from people you trust.
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You need a good M&A attorney. But they aren't cheap. Here's my two cents.
You probably want the ability to collar their stock at very least and depending on what you think of their prospects you may ask them for a ratchet in the case of a stock decline. They probably won't give you the latter.
You want triggered acceleration of that vesting if they terminate you without cause. This is sometimes called double trigger vesting (first trigger is acquisition, second trigger is termination). You also want a decent employment contract in the meantime.
They may in fact be in position to say "this is the offer, we don't go back and forth on that" but what that USUALLY means is "this is the PRICE" and the terms thereof do get negotiated.
You need to make sure that you can actually DO those million ideas you have for the future. If these guys seriously acquire you and kick you out in three months, or acquire you and assign you to do something other than build your existing biz, you are probably going to be super disgruntled. An awful lot of acquisitions turn into "ok, that was nice, now do this instead." And hell, they might be buying you JUST to shut down a competitor. Heaven knows that has happened enough.
If you have good angel/VC contacts, this might be an ideal time to say "hey I have an offer, I'm not ready to give up at this point, give me a terms sheet for growth capital on these terms" and run like hell. Keep in mind that this is ALSO likely to be shark infested waters.
You probably want the ability to collar their stock at very least and depending on what you think of their prospects you may ask them for a ratchet in the case of a stock decline. They probably won't give you the latter.
You want triggered acceleration of that vesting if they terminate you without cause. This is sometimes called double trigger vesting (first trigger is acquisition, second trigger is termination). You also want a decent employment contract in the meantime.
They may in fact be in position to say "this is the offer, we don't go back and forth on that" but what that USUALLY means is "this is the PRICE" and the terms thereof do get negotiated.
You need to make sure that you can actually DO those million ideas you have for the future. If these guys seriously acquire you and kick you out in three months, or acquire you and assign you to do something other than build your existing biz, you are probably going to be super disgruntled. An awful lot of acquisitions turn into "ok, that was nice, now do this instead." And hell, they might be buying you JUST to shut down a competitor. Heaven knows that has happened enough.
If you have good angel/VC contacts, this might be an ideal time to say "hey I have an offer, I'm not ready to give up at this point, give me a terms sheet for growth capital on these terms" and run like hell. Keep in mind that this is ALSO likely to be shark infested waters.
Oh yeah, and: congratulations!
We went through a similar, albeit much smaller, acquisition process recently. However the general principles still apply:
1) If they are genuine bidders, then there will be room for negotiation. How much of course depends on a) how much they want to buy and b) how much you are prepared to sell for. Anyway, if they are genuine buyers they will be prepared to negotiate. If they are not, or you can not agree on a deal, then you haven't lost anything (except perhaps some lawyer fees) so don't stress.
2) You should negotiate both the price, the cash/stock mix and the terms. This latter is by far and away the most complex, and YOU MUST GET A GOOD LAWYER TO ADVISE. The devil is in the details, and as you mention, you must make sure they can't do something like arbitarily fire you and take away your stock.
3) Figure out where you are prepared to sell for. Pitch this to them. Don't be a pussy about this. After the back and forth, if you can agree on broad terms great.
4) They will probably want to draw up the contracts. Of course this means the deal will be weighted in their favour, hence YOU MUST HAVE A LAWTER TO ADVISE - and be prepared to haggle on the various clauses.
5) I would say vested stock is pretty common. But you must make sure you are protected against dilution. And you must check the details concerning the circumstances under which they can take your stock. E.g losing your stock for anything other than gross negligence is a no no.
Good luck!
1) If they are genuine bidders, then there will be room for negotiation. How much of course depends on a) how much they want to buy and b) how much you are prepared to sell for. Anyway, if they are genuine buyers they will be prepared to negotiate. If they are not, or you can not agree on a deal, then you haven't lost anything (except perhaps some lawyer fees) so don't stress.
2) You should negotiate both the price, the cash/stock mix and the terms. This latter is by far and away the most complex, and YOU MUST GET A GOOD LAWYER TO ADVISE. The devil is in the details, and as you mention, you must make sure they can't do something like arbitarily fire you and take away your stock.
3) Figure out where you are prepared to sell for. Pitch this to them. Don't be a pussy about this. After the back and forth, if you can agree on broad terms great.
4) They will probably want to draw up the contracts. Of course this means the deal will be weighted in their favour, hence YOU MUST HAVE A LAWTER TO ADVISE - and be prepared to haggle on the various clauses.
5) I would say vested stock is pretty common. But you must make sure you are protected against dilution. And you must check the details concerning the circumstances under which they can take your stock. E.g losing your stock for anything other than gross negligence is a no no.
Good luck!
Also, delete this thread now. They are probably going to be sent this link by someone in their company.
Get a lawyer. Go check out the list of suggested good start-up lawyers on http://venturehacks.com
You do NOT want to sell without a negotiated contract for your (all of you) ongoing employment. You need a lawyer for that, DON'T do it yourself.
Some of what the other side is telling you is clearly manipulative (no surprise). If they want to buy you, insist that they do it properly. You owe it to yourselves, and the other side will respect you for it - guaranteed.
You do NOT want to sell without a negotiated contract for your (all of you) ongoing employment. You need a lawyer for that, DON'T do it yourself.
Some of what the other side is telling you is clearly manipulative (no surprise). If they want to buy you, insist that they do it properly. You owe it to yourselves, and the other side will respect you for it - guaranteed.
I agree with the first comment here. You should never be afraid of consulting your lawyer or bankers/financial consultants. It sounds like they want to keep you in the dark if it really is as you describe. Also, if you are already profitable, then your need is probably more growth and market-oriented rather than selling, and you'd be better finding a partner who wants to help you guys grow rather than take away from you what you've built and giving you paper for it in return. In other words, helping you to build the value of your OWN equity/paper than theirs, which essentially you'd be doing if you sold and received more paper than cash. You built this business presumably because you wanted to work for yourselves and not the "man", so consult with lawyers and trusted others on how to get investment to grow and hang on to what's yours, and if they're that surprised you haven't had more offers, there are likely other partners that "feel" right. You don't have to put out for the first date that comes along.
1. It makes more sense to value your company on the profit as opposed to revenue, and throw in some expected growth for good measure. For example, would you rather buy Ford with $132B in revenue, or the Google with $28B in revenue? The market cap of Google is 3 times that of Ford $197B vs $65B. Or Yahoo (revenue $6.5B, market cap $20B) vs Google ($28B, $197B). Google's revenue is <5 times that of Yahoo, but it's market cap is 10x.
2. Why do you judge the offer to be low by 20%. Is it 20% lower than what someone else would likely pay, 20% too low based on your expectations. If you can get a better deal somewhere else, why would you accept this one?
3. They know you are young and are likely leveraging this to their benefit.
4. IANAL show maybe you should choose to disregard all of the above and find one to help you.
Email the lawyer we work with, Chris Hurley at Beacon Law.
http://www.beaconlaw.com/team.html
Phenomenal guy, wicked smart, former startup CFO, and has been involved in loads and loads of M&A's. He'll be able to guide you through this 100%.
http://www.beaconlaw.com/team.html
Phenomenal guy, wicked smart, former startup CFO, and has been involved in loads and loads of M&A's. He'll be able to guide you through this 100%.
You're absolutely doing the right thing trying to figure exactly what's true and what's not. I've been through this multiple times myself and with several others. If you don't do it right, you could literally leave millions on the table.
I've written up advice to sellers in a couple of places: http://www.askshane.org/daily-tips/how-to-sell-a-website.php http://www.askshane.org/features/lessons-from-an-acquisition...
I'd be happy to talk to you more about this; feel free to contact me if you want to jump on the phone. There's a link at the top of both of those articles.
I've written up advice to sellers in a couple of places: http://www.askshane.org/daily-tips/how-to-sell-a-website.php http://www.askshane.org/features/lessons-from-an-acquisition...
I'd be happy to talk to you more about this; feel free to contact me if you want to jump on the phone. There's a link at the top of both of those articles.
So far you've gotten some great advice in the other comments: Don't agree to sleazy terms, get a lawyer involved, etc.
But in addition to all that, here is another point I didn't see mentioned so far. After working for yourself for 5 years, (or perhaps more) do you really want to take a corporate job?
Speaking for myself, after working for myself for a lengthy period of time, I'm quite sure I don't want to have a "9-5" ever again. I've turned down a number of job offers over the years, and I have no regrets.
If the deal is all cash, paid in full at closing, then it doesn't matter (too much) if you get fired on day 2. You can go right back out there and start another company.
But in addition to all that, here is another point I didn't see mentioned so far. After working for yourself for 5 years, (or perhaps more) do you really want to take a corporate job?
Speaking for myself, after working for myself for a lengthy period of time, I'm quite sure I don't want to have a "9-5" ever again. I've turned down a number of job offers over the years, and I have no regrets.
If the deal is all cash, paid in full at closing, then it doesn't matter (too much) if you get fired on day 2. You can go right back out there and start another company.
I have reasonably good background in this with a number of successful exits to various publicly traded firms. Drop me a line per my contact info and let me know what your industry is, as long as it isn't directly competitive with anything I'm working on or invested in, I'll sign an NDA and we can talk - if it is in an overlap industry, then the dance becomes a little more complicated. But I'll give you an hour of time and advice for free, and if you want my help beyond that, we'll figure something out.
I can't believe there's a risk you could be fired on day 2, and not receive any of the (bulk of the) stock.
How much can you "love" a company that would put you in the position of facing this possibility?
How much can you "love" a company that would put you in the position of facing this possibility?
Sounds like a horrible deal. If you want some cash out, talk to VCs and negotiate taking some investment for growth and some for the founders to take home.
If you don't need the cash... then why bother?
If you don't need the cash... then why bother?
Buy the services of a real financial advisor and assume that, after sale, that's it: you will have to personally disengage from the company (e.g. forget your big ideas you want to work on). Nobody is conceivably making anyone an 8 figure offer to get a management team eager to pursue their big ideas. The faster you can exit the more you'll maximize your win.
Take the exit unless you are already rich. Get the help of a good financial advisor and lawyer to make the most of it.
Take the exit unless you are already rich. Get the help of a good financial advisor and lawyer to make the most of it.
I've never sold a company, but I've dealt with a couple of pretty questionable cofounding/employment contracts lately, and making a deal seem "very much like a standard-fair offer" seems to be an old trick. I had someone tell me they'd been using an agreement for years when there was an obvious typo and font change to show me it had probably been altered at the last minute.
> We're about 5 years old and are highly profitable and have been for a while.
If highly profitable means you all earn enough money to drive the car you want, live in a comfortable house and take your family to holidays once in a while, you are on the right path and continue to walk it. Why should you bother with additional risks if you have job you like and it earns you enough?
If highly profitable means you all earn enough money to drive the car you want, live in a comfortable house and take your family to holidays once in a while, you are on the right path and continue to walk it. Why should you bother with additional risks if you have job you like and it earns you enough?
Read the original post. They gave some reasons.
Talk to these guys http://www.grellas.com/acquisitions.html
Perhaps this is superfluous in light of all good advice youlve already received, but: these guys are not doing you a favor! You owe them nothing. There is no reason whatsoever to cut them any slack. You have something they want and you can make them bleed to get it. Honestly, these are the same tactics as employed by Moroccan carpet salesmen.
At least they give you tea.
I'm pretty sure you've already blown your cover as far as the offering party is concerned. How many big tech firms have made 8 figure offers in the last day or two? All of them have tons of employees that read HN, so unless none of them are aware of this offer you've just given a lot away.
When you guys started the company, was the plan to sell out? If not, and you guys are making good money, then why sell? If you guys would like to try something new, that is a different story. But given you are happy where you are and you received a low-ball offer, I'd wait it out.
"Sorry for the anonymity but I didn't want our ignorance to be made any more obvious than it already is to the potential purchasers :)"
Why is that a problem? I often notice this kind of questions asked anonymously, and I am trying to figured out what is the problem.
Why is that a problem? I often notice this kind of questions asked anonymously, and I am trying to figured out what is the problem.
Some lawyer's advice on negotiating: http://www.diplom.org/Zine/F1997R/Windsor/lawdip.html
You have to abstract away from the Diplomacy specifics.
You have to abstract away from the Diplomacy specifics.
also, just a quick thought.
You talk about your ignorance. That's true. If you could PLEASE PLEASE read any book on reality like Robert Greene or Art of War or even 50 Cent's book.
Distinguish between being a pimp, being a whore, and being a trick.
Right now their offer is them whoring you out.
Also, the more the company offering to buy you out is pretending to be good and selling you on how much you'll enjoy working there, the higher the chance they are screwing you over.
PLEASE think about what I wrote about the next big boom being around the corner. It would be madness to
a) agree to such a lop-sided deal.
b) do it at this point of time.
You talk about your ignorance. That's true. If you could PLEASE PLEASE read any book on reality like Robert Greene or Art of War or even 50 Cent's book.
Distinguish between being a pimp, being a whore, and being a trick.
Right now their offer is them whoring you out.
Also, the more the company offering to buy you out is pretending to be good and selling you on how much you'll enjoy working there, the higher the chance they are screwing you over.
PLEASE think about what I wrote about the next big boom being around the corner. It would be madness to
a) agree to such a lop-sided deal.
b) do it at this point of time.
It's reasonable to have SOME amount of the purchase value vest, but 100% is not reasonable. Common enough to get half or two thirds of it down and the other as earnout milestones.
Feel free to email me - elad_s at eladgil dot com.
I am happy to provide some direct advice or put you in touch with someone who helps with these sorts of things for a living.
I am happy to provide some direct advice or put you in touch with someone who helps with these sorts of things for a living.
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Sell and spend a few years with your family. You wont regret it.
They're trying to take advantage of you.
Always assume the counter party will try to stick you with the worst case scenario and ensure your agreements and contracts guard you against that.
HIRE A LAWYER and incentivize them correctly. If they 'work against' you, they work against themselves, and they will be investigated and disbarred.
It's not about the people you're dealing with - the entire upper management of the acquiring company can change within months, and boot you with 3 years of equity that isn't vested, or dilute you to worthlessness, or any number of things that will short change you.
Cash is king.
Always assume the counter party will try to stick you with the worst case scenario and ensure your agreements and contracts guard you against that.
HIRE A LAWYER and incentivize them correctly. If they 'work against' you, they work against themselves, and they will be investigated and disbarred.
It's not about the people you're dealing with - the entire upper management of the acquiring company can change within months, and boot you with 3 years of equity that isn't vested, or dilute you to worthlessness, or any number of things that will short change you.
Cash is king.
Why would you vest an offer worth 3x revenue over 4 years unless your business was about to collapse? That's an atrocious offer as stated. You should get 3x earnings today (or some multiple depending on prospects and margins) and earn out more over 3-4 years.
Edit: Sorry I must be tired. This is a revenue multiple not income. Revenue multiples are not particularly helpful in valuing a company with a mature business model. Gross profit would be far more useful.
Edit: Sorry I must be tired. This is a revenue multiple not income. Revenue multiples are not particularly helpful in valuing a company with a mature business model. Gross profit would be far more useful.
> Gross profit would be far more useful.
Yes, and they have not mentioned their margins anywhere. 3x revenues might be generous (no further growth, lousy margins) or it might be terrible (lots of growth, great margins).
Yes, and they have not mentioned their margins anywhere. 3x revenues might be generous (no further growth, lousy margins) or it might be terrible (lots of growth, great margins).
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You should also post this on Quora.com under "Startups" to make sure you get all possible answers.
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To me, this would be enough to immediately reject the offer. I don't believe in doing deals which make my worst case worse unless I will be in a position where I can prevent the worst case from happening -- and it doesn't sound like you'd have any way to avoid getting screwed here.
they've expressed to us that involving bankers would 'change the tone' of the discussion, whatever that means
Any time someone tries to convince you to not consult your advisors, run away immediately. If they think they're offering you a good deal, they should be encouraging you to talk to everybody.